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New Markets Tax Credit (Portfolio 585)

Tax Management Portfolio, New Markets Tax Credit, No. 585, describes the requirements and operation of the New Markets Tax Credit in §45D.

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DESCRIPTION

Tax Management Portfolio, New Markets Tax Credit, No. 585, describes the requirements and operation of the New Markets Tax Credit in §45D.

The New Markets Tax Credit was established by Congress in 2000 and is intended to encourage investment in low-income communities. The credit is available to both individual and corporate taxpayers and is equal to 39% of the capital invested in a qualified community development entity, a for profit or nonprofit entity that commits to the rules of the program, which in turn must loan to or invest substantially all of such capital in qualified businesses operating in low-income communities. The nonrefundable credit is claimed in seven installments on the date of the original investment and the six anniversaries thereof. If the capital is withdrawn prior to the end of the seven-year period beginning on the date of the investment, the entire credit is recaptured. The credit is limited by the amount of allocation authority available each year, which is awarded based on a competitive application process.
The tax rules governing eligibility for the New Markets Tax Credit are contained in §45D and the regulations thereunder, whereas the program is managed by the Community Development Financial Institutions Fund of the U.S. Treasury Department, which promulgates additional rules and requirements pertaining to the award and use of allocation authority.


The overall purpose of this portfolio is to introduce and explain the operation of the tax rules governing the New Markets Tax Credit. To that end, the portfolio discusses key definitional terms, applicable eligibility tests and other requirements, and particular topics, such as the possibility of recapture and issues with certain credit structures.


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AUTHORS

STEVEN F. MOUNT
Steven F. Mount, B.A., Muskingum College (1976); J.D., Harvard Law School (1979); admitted to bar, Massachusetts (1979), New York (1982), Ohio (1986), U.S. Tax Court (1989); panelist, Novogradac New Market Tax Credit Conference series; member, National Association of Real Estate Investment Trusts; Advisory Board Member, Bloomberg Bureau of National Affairs, Inc.; author of former BNA portfolio on the taxation of real estate investment trusts; author of several articles on REITs and other issues; recognized in The Best Lawyers in America since 2006; recognized in Ohio Super Lawyers.

TABLE OF CONTENTS

Portfolio 585-1st: New Markets Tax Credit

Portfolio Description

Authors

Technical Advisors

Description

Detailed Analysis

I. Introduction

II. Qualified Active Low-Income Community Business

A. Definition of Qualified Active Low-Income Community Business

1. Real Property Must Have Substantial Improvements

2. Residential Rental Property Prohibited

3. No Development or Holding of Intangibles

4. Certain Prohibited Activities

5. Certain Farming Activities Prohibited

6. Leasing Real Property or Business Assets

B. Nexus to Low-Income Community

1. Gross Income Test

2. Tangible Property Test

3. Services Test

C. Other Requirements and Rules

1. Limit on Collectibles

2. Limit on Nonqualified Financial Property

a. Definition of Nonqualified Financial Property

b. Reasonable Amounts of Working Capital

c. Other Exceptions and Safe Harbor for Construction

d. Calculation of Nonqualified Financial Property

e. Techniques to Satisfy the Nonqualified Financial Property Test

3. Proprietorships and Portions of a Business

4. Reasonable Expectation on Status

5. Non-Real Estate QALICBs

D. Use of QLICI Proceeds

III. Low-Income Community

A. In General

B. Targeted Populations

1. Low-Income Persons

2. Individuals Who Lack Adequate Access to Loans or Equity Investments

IV. Qualified Low-Income Community Investment

Introductory Material

A. Loans to or Equity Investments in QALICBs

1. QLICI Loans Must Be True Debt

2. Restrictions on QLICIs to “Related Persons”

3. Reinvestment of QLICI Proceeds

a. In General

b. Loans Purchased from Originator

c. Special Rule for Proceeds of Non-Real Estate QEI

4. Special Rule for Reserves

5. Special Rules Limiting Amount of QLICIs

B. Certain Loans Purchased from Other CDEs

C. Loan to or Equity Investment in Another CDE

D. Financial Counseling and Other Services to Residents of LICs

V. Qualified Community Development Entity

VI. Qualified Equity Investment

VII. Allowance of Credit and Basis Reduction

VIII. Recapture

Introductory Material

A. Recapture Events

1. Failure of CDE to be a Qualified Community Development Entity

2. Failure to Satisfy Substantially All Test

3. Redemption of QEI

4. Seven-Year Credit Period and Statute of Limitations

B. Recapture Amount

C. Reporting

D. Anti-Abuse Rule

E. Waiver

F. TEFRA Provisions

IX. NMTC Investor

X. Typical New Markets Tax Credit Structure and Issues

A. Leveraged Structure

B. A/B Note Structure

C. Fees

D. Typical Exit Arrangements

E. Indemnities

F. Economic Substance

XI. Combining the Credit with Other Tax Benefits


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Diagram of New Markets Tax Credit Leveraged Structure

Worksheet 2 New Markets Tax Credit Application Timeline and Q& As

Worksheet 3 Links to Lists Of New Markets Tax Credit Allocation Recipients Since 2002

Worksheet 4 NMTC Census Data Transition FAQs

Worksheet 5 Map of Gulf Opportunity Zone

Worksheet 6 Audit Technique Guide for New Markets Tax Credit

Bibliography

Periodicals

2002

2003

2004

2007

2010

2011